July 11, 2012 Executive Compensation Executive & Director Pay Design Articles

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Executive & Director Pay Design

When Do Performance Options Make Sense? Performance Stock Options

The evidence to date does not suggest a significant shift to performance-contingent stock options, despite the pressure for companies to enhance the appearance of having “performance-based” pay.

Yet there are circumstances where this vehicle may make good sense, and in this article we outline the benefits and risks of performance options, and when they might be considered as part of an overall pay strategy. 

Many executive compensation observers have suggested that performance options — standard stock options with one or more additional performance conditions — will become a more significant and prevalent long-term incentive vehicle over the next several years. This viewpoint is driven by the perspective espoused by proxy advisors (e.g., ISS and Glass Lewis) and some shareholders that time-vested options are not “performance-based” because the opportunity is earned over time regardless of performance and the ultimate value delivered.

The argument follows that since performance-based equity is a superior incentive to time-based, options with performance conditions to be earned must be “better” than time-vested options. These observers expect the use of performance-based options to grow just as performance shares grew alongside or as a replacement to time-vested restricted share awards.

View the full article as it was originally published.

Greg Arnold

Todd Sirras

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